NOLTE NOTES
Don't Worry, Be Happy!
by Paul J. Nolte, CFA
September 8, 2009

The recession is over and in nearly record time! At least according to Morgan Stanley and Goldman Sachs, the recession that nearly consumed the country is now just a blip on the economic radar screen, a footnote in an otherwise long and glorious economic expansion. Oh, and those job losses of August, no big deal as they were lower than expectations and have been getting less worse for much of the year. Wall Street is nearly giddy with the prospect of happy days once again gracing the investment community, if it weren’t for the pesky mountain of debt and consumers that have barely poked their noses out of the bomb shelters. Manufacturing, judging by the various reports, seems to be on the mend, however they comprise less than 40% of the economy, while services continue to contract. Banks are not making loans, debt levels remain high and looking at retail sales, the cash for clunkers program, a success for autos, stole purchases from many other parts of the economy. Don’t worry, be happy!

With all the good economic news floating around last week, it is surprising the markets took time out of their furious rally and actually fell a bit on the week. Many of our indicators remain buried in overbought territory, while some are showing signs of a modest decline on the horizon. Our operating thesis for the next couple of months is that we see a sideways market that corrects many of the overbought conditions that now exists before actually declining into year-end, as consumers remain reluctant to crack open their wallets too far and the Christmas selling season is modest. Since May, there have been four days with volume 1.6 billion shares and in each case, the markets were lower. Obviously the markets have had many more “up” than down days during the summer months, however on those occasions when investors were “out in force” were on days that the markets gave up ground. An indication of things to come? Not necessarily, as the markets need to begin demonstrating a regular occurrence of higher volume on down days vs. up days. So far, we have a few outliers that need additional confirmation in order to say that we should be running for cover. With the end of summer break, keep an eye on volume.

So what is going on with gold? Gold prices are once again making an assault upon $1000oz, a region that has turned back prices on four other occasions. The dollar is actually behaving well, having essentially flat-lined since early August. Commodity prices have been in full retreat over that same time span. Finally, gold stocks, although higher are not mirroring the rise in bullion prices. Are gold investors anticipating a spate of inflation? Unlikely, with bond yields declining over the past month. A dollar hedge? Maybe, but given the quiet dollar trading, gold buyers are jumping the gun. Stocking up for the Christmas holiday? My wife hopes!! Bond yields maintain their decline last week, although a reversal on Friday took some shine off the week. The model is stuck in the buy mode – lower yields ahead.

© 2009 Paul J. Nolte, CFA
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The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

Contact Information

Paul J. Nolte, CFA | Director Investments, Hinsdale Associates | 630-325-7100 | Email